Chadd Garcia breaks down WaterBridge's post-IPO value creation story $WBI
Summary
Main Pitch – WaterBridge (WBI): Leading produced water processor in the Delaware Basin with contracted volumes, robust pore space access, and a vast pipeline network; positioned for a re-rating as investors recognize its waste-industry parallels.
Valuation & Growth: Viewed as mispriced midstream at IPO, but with ~double-digit volume growth, rising pricing via MVCs, and potential EBITDA ramp from ~$450M (2025) toward ~$900M pre-2030, supported by 20%+ unlevered ROIC projects and fast paybacks.
LandBridge (LB) Synergy: Sister company owns pore space/land rights critical for injection, enabling WaterBridge’s network advantage; conflicts managed via policies and independent committees, with customer-shareholder alignment acting as a check.
Key Stakeholders & Validations: Devon Energy (DVN) owns ~20% and secured long-dated pore space, committing to WaterBridge delivery; Diamondback (FANG) history with Rattler/Deep Blue highlights consolidation logic; Waste Connections (WCN) deals in oilfield waste validate the waste-comp framework.
Industry Framing: Covered by midstream analysts, yet economics resemble waste management (municipal waste comps trade mid-teens EBITDA multiples) with lower maintenance capex due to lack of truck fleets and network redundancy.
Regulatory & Environmental: Texas tightened disposal pressure rules in 2024, aligning with WaterBridge’s under-pressurized best practices; NM-to-TX cross-border permitting dynamic remains, with network scale mitigating operational risks.
Macro & Volumes: Produced water volumes are resilient as wells age and water cuts rise (e.g., 4:1 trending toward 6:1), even if drilling slows; Delaware Basin remains a low-cost locus within the Permian Basin.
Capital Allocation & Outlook: Near-term cash flow reinvested in high-return growth; over time expect modest dividend and opportunistic buybacks; core theme spans Produced Water, Waste Management parallels, and Midstream Pipelines misclassification.
Transcript
You're about to listen to the Yet Another Value podcast. Today's episode is my friend Chad Garcia is on for I think it's the fifth time. He told me it's the fifth time. So, he's got a shirt coming his way. But Chad is awesome. Uh some of his pitches, I mean, look, it it's no surprise. He comes on, he pitches a stock, and then six months later, you see 15 generalists who've gone long the stock on the thesis that Chad pitches. Does great detailed work. He's done great work on this. We're going to talk about Waterbridge. Ticker there is WBI. It's a recent IPO. uh look full see the full disclaimer at the end of this podcast but nothing's investing advice but Chad's done great work we have a really interesting conversation about a really interesting company because there really aren't a lot of public company parallels and I think you'll see that's why maybe there's opportunity here so we're going to get there in a second but first a word from our sponsors this podcast is sponsored by try.com look I've been harping on it for months if you like this podcast you are going to like try.com it is interviews between two bysiders who are talking about stocks they know so It's very similar to this podcast except you know in this podcast one person the guest knows the stock they're talking about and I have nothing no clue and in the try.com interviews two people know what they're talking about so twice as much fun. Look uh I've been harping them for months and I will tell you lots of you have gone checked it out listened to it and the feedback has been fantastic. So it's not just me saying it. It's fellow yet another value podcast listeners saying it. So go to trirtrada.com now and go check it out and see why I'm so excited about it and why I think you will be too. All right. Hello and welcome to the yet another value podcast. With me today, I'm happy to have Chad. I can't remember if it's the third or fourth time, but one of the most popular guests on the podcast, Chad Garcia. Chad, how's it going? >> Good. Good. I think it's I think it's the fifth time. So, >> no way. That means you qualify for the shirt. I should have worn the shirt today. Uh we'll talk about that after the podcast. >> I have my hat in the background, so you know. >> But both of our hairs are both of our hair is on point today, though, so we can't mess that up with a hat. Uh super excited to talk today. This is uh actually one of the most interesting companies I've stumbled on this year. But before we get to it, just disclaimer remind everyone nothing on this podcast investing advice. You can see the full disclaimer at the end of the podcast. So Chad, the company we're going to talk about today is Waterbridge. The ticker is WBI. You have done uh fantastic work on this. So I I I read your Q3 letter. You and I had dinner like the night before this IPOed and we were talking a bunch about it. So I I'm just going to toss it over to you and let you cook. Uh what is WBI and why are they so interesting? Yeah, Waterbridge is the leading processor, cleaner and disposal company of produced water. They primarily operate in the Delaware basin in the in the Perian Basin. And so when oil is is is fracked, you know, some water comes up. Some of that's the water that's used in the fracking process, but most of that is water that was that was seawater that was buried millions of years ago with the organic matter that turned into the oil and gas that that they're extracting in the fracking process. And that produced water they call it flows out with the oil for the as long as the as the oil well flows. And so in the Delaware basin, you get four barrels of produced water for one barrel of oil. So they call that the water cut. And then what they've noticed is that as a well ages, that water cut goes up over time. And then in various areas, you know, some areas just have higher water cuts. So, you know, right now you're starting off with a with a 4 to one water cut. In 2030, you'll likely have a six to1 water cut. And so water is the choke point for oil production. If if you're Exxon and you're developing in the Peran Basin, if you don't have a place to put the water, your production shuts down. And so Waterbridge, which went public a couple months ago, has a vast network of pipelines. But they also have a relationship with Landbridge, a sister company that went public about a year and a half ago that owns a lot of the land where the pore space is located. So the pore space is the geographic formation where the water is deposited and think of that as like a landfill. Perfect. That's a great overview. So just specifically, so you mentioned water bridges handling the handling the water cut from all these uh from this oil and gas you know from the perium from any well that's getting drilled out there and then you mentioned land bridge is kind of where you take the water and you actually inject the water and kind of store it. But I just wanted to so what specifically does waterbridge own in this process that they're kind of handling the water? They own the the pipelines that transport it and then the cleaning facilities that separate the oil because you'll there's going to be oil that's with that's mixed in with this with the sludge and the solids and the and the produced water. And so you separate out the oil and you recover it. You can sell that. It's called skim oil. The solids get removed and deposited into an industrial landfill. So they own some industrial landfills as well. And then the remaining liquids get deposited into the pore space. >> Perfect. So let let's start here. You mentioned they IPOed late September I want to say. So you know like 45 days ago they get picked up by I think 12 brokers pick them up uh with coverage. You know I I'm kind of looking. It looks like seven of them have buys and four of them have neutral something like that. And you know this the stock IPO is at 20 and it's at $24 per share right now. So, I I lay all that out to ask you like when I look at this, I say, "Hey, looks like it's relatively relatively well covered. Looks like the IPO was pretty successful. You know, 20% in uh 45 days. This isn't it's not core wave going up 5x in 30 days, but you know, that's a pretty pretty nice IPO, particularly for like kind of a more state industry. So, just want to ask company well covered, well well reggarded, successful IPO. What are you seeing that the market's missing that you think makes this kind of an alpha opportunity here? Well, it was 11 times over subscribed. So, for an oil company, I think that was a pretty good, you know, it wasn't it wasn't, you know, 20 times over subscribed like, you know, maybe a Circle Internet Group or something. Um, last I counted there was 11 sellside analysts that covered it. I've read eight of the reports. Not one report mentions the parallels of this business to to waste. And you know, you and I, we had a podcast last year on sec on secure. It was called Secure Energy Services at the time. They've subsequently changed their name to Secure Waste Infrastructure Corp. Um, you know, that's that's where I learned a lot about this business, you know, working with them and then also my my investments in the waist base with connections and and GFL. But you know similar situation between the two companies whereas you know secure was covered for for many years by energy services firms. If you look at the economics of their businesses and if you look at some of the modes surrounding the operations they look like waste companies. I mean they have landfills they have some industrial landfills. It doesn't that parallel doesn't get any more cleaner. And then the pore space where you deposit it also has some very similar geographic and regulatory modes the landfill has. Um secure made that connection in the last year they have converted most of the analysts that cover them to waste analysts or general industrial analysts. And so they've been beating on, you know, we're not a energy company. We're a waste company for, you know, a couple years now, but it's in Canada. It's a small cap. Nobody's paying any attention. Landbridge or Water Bridge goes public. You know, they can't go public with with something that's, you know, story that people aren't ready for. So they hire JP Morgan's energy bankers. They do a good job getting it public. Um the the pitch kind of looks like a mid-stream pitch whereas you know like you know a mid-stream pipeline business might trade 9 10 11 times. You know maybe this one has a little bit better economics to it a little higher return maybe should go for a little bit of a premium but you know nobody's yet making the waste parallels and you know just like secure you know has has been making that argument. Um, Waterbridge is management. They report in a couple weeks. They understand the parallels of their business to the waste industry. They are going to be beating the drum, too. And they're likely going to have a much bigger megaphone than the Secure Guys did um because they're an American company and, you know, they'll get a little bit more exposure. But right now all the analysts that cover it are are mid-stream analysts and they're looking at it with that view and not looking at it with the with a waste view that so if I was kind of summarizing what you're saying you're saying hey look this IPOed and these guys knew it right they wanted to go public this IPOed and people were taking as you said an MLP energy infrastructure viewpoint and you think over time and that got in a fine multiple right we can talk to multiple trading but like a low double digit multiple right now I think is kind of what and what you're saying is hey This has one of the reasons this is an alpha opportunity is this has a lot more in common with the waste management industry and the waste management industry probably trades for a mid- teams even so you think there is a lot of kind of multiple expansion as the company delivers people get to understand the story all that sort of stuff am I am I kind of summarizing that correctly >> well I think they're going to have ample growth just within their own within their business and so from my risk management perspective I'm like okay on earnings growth by itself this is you know call it a double in five years you know I can underwrite that but it's traded nine times evida waste waste companies traded 15 times I evbida you get the earnings growth plus the multiple expansion and that's where things get really interesting well let's talk about uh the earnings growth so why don't we lay out kind of look they just IPOed in September this podcast is a little bit bit different to prep for because there is the S1 and then there's nothing else public from these guys yet right they haven't done They're in the ear the post IPO blackout period. We don't have an earnings call. We don't have Q earnings. So, >> well, the post IPO blackout period ended, but it ended right into the earnings blackout. Also, [laughter] >> blackout's a blackout. Just uh I'm not going to say my college days, but you know, maybe every now and then, my Marty GR days. Um what are you kind of forecasting? Let's lay out what is the valuation look like on a 2025 or a next 12 months number, whatever you want. Let's lay out that valuation and then we can use it to build to like kind of out years. >> Well, over 70% of the revenues contracted and a lot of the recent contracts they've been getting they they've announced like three large projects that they're spending capital on and the three large projects um are minimum volume contracts and and what's interesting is that the pricing of these contracts are well above kind of the spot rate. So the spot rate called 65 cents a barrel for processing. The last contract that they signed was was just over a dollar. And so that and and that was a 10 10 15 year contract. And so that does give you um some indication that the EMP companies are worried about having an outlet for the for their water in the future. And if they can lock it up for a decade, maybe a decade and a half, then they'll pay a premium for that. But um on the minimum volume contracts alone their volume should increase you know I call it low double digits. So say like 10%. But they can also pick up more business just within their existing network that that's not fully utilized. Nobody sets minimum value contracts minimum volume contracts at the level that they think they're going to do at the max level. They kind of set it below. So there's probably incremental volumes from those contracts that are going to flow in. And then, you know, they have, you know, three large contracts already um disclosed that they're spending capital on. One of them's probably ripe for for phase 2 expansion. I would I would imagine that that would be announced within the coming months. And so there there's a lot of growth coming their way. So I it's easy to to get to a a mid teens to to high teens volume growth and then again you get pricing that that's going to be flowing through you know and and you know with probably not much incremental cost to it and so from an earnings growth perspective it's going to be even it should be even nicer >> but if we could just quant so uh just kind of next 12 months what what do you kind of think the the near-term ebidal looks like? >> Yeah. So like it so so 25 450 IBIDA I think would be very conservative and then you just compound that at you know 15 to 20% for the next three years. >> Yep. So about 450 in Ibida and you could be talking about if if I took it a little further 900 million Ibida isn't out of the question by before 2030 if I'm kind of doing that math in my head correctly. >> Yeah. Yeah. Yeah. Yeah. And then from an incremental forcebased perspective they've got you know they'll they'll probably do 2.8 8 million barrels a day and 25 and they've got incremental pore space of 6 million barrels a day that they could that they have access to which is probably worth depending upon pricing between a billion and a billion four of incremental IBIDA and so you know that's you can see how they can get to a billion and a half two billion of ibida um just within just with the pore space that they currently have and that's not including some some pore space that Landbridge just bought. If you look at Lambridge's press release, they they bought some more pore space. They paid a little over $200 million for it. They haven't quantified how much incremental pore space is yet. So hopefully we'll get that on the earnings call, but you know, I think that there is going to be a need for the for the pore space in the in the perian because the water cuts go up over time. The areas where they're going to be drilling in the in the near future going to have higher initial water cuts. um they have plenty of incremental pore space and pipeline to get it there and so I think it's just a matter of speed rather you know as as opposed to like how much growth they end up with. So I don't I you know it's a matter of how quickly it happens. I >> I want to come back to that in a second but just to quantify. So the stock as you and I are talking about $24 per share. You can correct me if I'm wrong but I've got the enterprise value around $4 billion at these prices. >> Yeah. >> Okay. And and we just said 450 in Ibida. So people >> probably 43 43. >> So people can do that math that slightly under 10 times around nine times IBIDA on the near-term numbers Chad is talking about and then if you go out you know you you quickly get to 5x ebida if and when all this growth gets delivered. Let's talk about that growth. So you know these guys the returns on invested capital here are I don't want to say insane but they're really effing good right? You're talking about multiund million dollar projects, these pipelines, all the space and everything and they're getting 20% plus returns on invested capital on lever, right? 2530 is not out of the question. Yeah, that that billion the billion the billion to billion four of of incremental pore space incremental ebid of the pore space that they have would probably cost them three to three and a half billion dollars to realize and and that's like and that's >> if they're it's like a platform and so like so you know you have speedway project right now which they're probably getting like you know like a three-year payback on that you know on a level right >> um that is running right through a sourass region that's going to be developed shortly. There's already minimum volume contracts on processing of that sour gas. Like that's right for an expansion of of of the Speedway pipeline. I I would imagine if when you're expanding a pipeline as opposed to like to initially putting one in, it's probably two-year payback. >> But that's what So that's what I want to ask because these returns are phenomenal. like these are phenomenal for infrastructure assets, right? Like uh so I'm gonna >> but they're not they're not paying for the pore space like as you you know you would do like this. We're we'll talk about the poor space when we talk about Lambridge in a second, but just the returns of their infrastructure projects are phenomenal. And and you know, I'll bring up this a couple times, but I I've done a little bit of work on midstream pipelines, especially offshore oil and gas pipelines. And offshore, you know, those are some of the those are pristine assets. And when these guys build, they build and they there's lots of, you know, you're building things 3,000 miles under the sea. Uh the returns there are like 20 to 25%. So these guys are actually getting better returns. Now as you said there's no poor space but I just went why can they get these types of returns because in my mind billions of capital 30% returns it people try to compete that away right and we can talk all the ways people can but just high level why do they kind of have the rights to get such great returns on pretty significant amounts of capital. >> Well I think it's their I think it's the relationship with Lambridge. It's like look at where look at where a lot of this water is flowing. A lot of this water is flowing out of New Mexico and and into Texas. And if if you're going from like the north south part border, I mean the on um the western part of that is is TPL property which Landbridge went and kind of a lot of the the acres there are are checkerboarded and so so TPL had a big area with checkerboard. Landbridge went and bought up the rest of the checkerboard and and entered into an agreement with with them. And so they've got that area locked up. There's a a ranch just east of that that was one of the initial areas where they where they would put in um shallow w um saltwater disposal wells that's kind of overpressurized. And so you there's not going to be any incremental pore space there. Um and then there's a ranch next to that where there's no no wells on it currently. and then you're back to landbridgeidge property and then then it starts to go up into the panhandle. And so anytime you want to cross land, um, a land owner is going to want to take a a a toll charge on on on the water that's kind of crossing over their land. And so it's not only having like a a massive pipeline network, but it's having one that's kind of efficient where you can avoid having to cross property where you have to pay the let me uh so let's go to Landbridge right now, right? Because I think that's the first thing when when I read this as one when you and I first started talking about it, it's the first thing that jumps out to you. They have a sister company, Landbridge. And for those who don't know, Chad, and I know this because we've talked, I've read your letters, Chad was very early on the Landbridge story, and the stock is up even after a recent pullback. Uh what 150% since it IPOed uh 17 and it's at 60 maybe today. >> Yeah. So the reason uh I I first started, my ears perked up when you mentioned Water Bridges. I was like, "Oh, Chad pitched Landbridge. This guy knows." But I think there is a question. Landbridge is Water Brbridge sister company, right? They are sister companies. You you can hear it in the bridge. They have the same controlling shareholder, all this sort of stuff. >> No, no, no, no, no. They have the same sponsor, but the shareholders are different. And that and >> my fault. This is the same sponsor who does own a ton of both these, right? But I I think the question, my first question when you see this is you said, "Hey, why can they charge this rates?" And it's because they cross the land and you know, the corner store at the corner of a really great, you know, 86 and lex, it >> gets a ton of foot traffic doesn't mean that it's going to make a lot of economic profit because guess what? the landlord keeps charging them every time the landlord is taking pricing and they're going to keep charging kind of for the marginal customer. Uh here I guess my first push back would be hey yes I know they've got a sister company in Landbridge but why isn't Landbridge ultimately the one who's saying hey the poor space and the land is the critical thing we're going to keep charging you keep charging and we get all the economic profit not you the pipeline >> I think I think it's having both the pipelines and a pipeline network that provides redundancy so if you're if you're an EMP operator and you have one water company and they have one pipeline so one amount of pore space like that might work for a few years but what happens if there's something that's that goes wrong with the with the saltwater disposal wall it loses its permit you know in years you know 5 6 7 8 9 10 it could have a force majure so you want to have a a vast network with with multiple access points for saltwater disposal walls and so it's having the whole network you know plus the pore space that gives it its real value. And so, you know, both of these entities are are are creating value and you know, Landbridge is is is uh you know, get gets paid a nice royalty fee. You know, some would some would say might a little bit above market, but you know, I think it's I think it's within market now. But uh over time you know as poor space is used up you know the rates that water bridges that water bridge charges and the rates that land bridge charge should you know should both go up in tandem. But you know there is a there is a risk that that um waterbridge could privilege landbridge and some economics kind of squeak out there. But keep in mind that, you know, Devon Energy owns 20% of Waterbridge and is a big customer. You know, I I doubt Devon would like to see, you know, some of their economics as a shareholder of Waterbridge squeak out to Lambridge and they're a big customer and so like there's a stick there, right? >> I'm I'm going to come to Devon in a second. I actually we'll get there in a second. I did look it up. Devon is mentioned 135 times in the S1. So I I really do want to talk about that, but I want to ask one other question. Right. So, Landbridge has the land. They are the landlord who has the who owns the property at the corner. You kind of can't get around that land, right? You've got the land. That's a great spot. The the other way returns here could get competed away is yes, Waterbridge builds the pipeline, but somebody else could come build the pipeline, right? A lot of these are new builds or expansions and somebody else could come and say or even, you know, Devon, Exxon Mobile, these customers, they've got huge balance sheets. Exon Mobile owns and knows how to operate PIP pipelines. They could say, "Hey, Waterbridge is about to spend $3 billion for a billion dollars in Ebida. Why don't we just do that ourselves?" Or why don't we go to name your other water operator here and say, "Hey, why don't you guys spend $3 billion for 900 million in EVO, right? Like take that take that return rate down and start having people compete against each other." So my second question is >> yes Devin did enter to um um basically a call option on pore space type agreement with with landbridge and so they you know the history of this is the operator goes to the water company the water company goes and finds the land owner that's the the history of the industry but you know Devon who owns part of waterbridge um is worried about access to poor space in the future and they went and and res like forward contracted core space with landbridge directly, you know, so they went around Waterbridge, but in doing so they did commit to use Waterbridge as as the deliverer of it. Um but you know to your point like yeah these companies can um you know have balance sheets and like have ran water businesses in the past but but the trend is for the large operators to divest of their water businesses because you know you want some scale right? So, you want to be able to handle the water of of operators that surround your property, right? But if you're, you know, if Exxon is is, you know, has a water asset and you're some small independent company and they say, "Hey, you can use our water asset, if pore space becomes tight, who do you think's going to get squeezed out, right? The small operator." And so, it just makes much more sense for these water companies to be independent. I mean if you look at Diamondback um had a water business called Rattler that they spun out and you know it traded it traded at a horrible multiple because you know they couldn't maximize the value because of that that dilemma and they ended up selling it to 5point which is the sponsor behind behind waterbridge and and landbridge and that that assets in the is in the Midland basin. Now, you know, I do think that that asset, you know, would work well in Waterbridge and ultimately you you you know, you may see it merge with Waterbridge, but to my point, you know, if Waterbridge is is getting mistreated and Landbridge is getting privileged, I mean, how happy do you think Diamondback, who owns who owns a good chunk of D Blue, that asset, um would be and wait in line to kind of merge these assets together? You know, I I think that there's I think that there's plenty of um people within the Waterbridge shareholder base that are also customers with big sticks just to make sure that everybody's treated fairly. >> Let me ask this question in different the Devon deal. We we mentioned that multiple time and now I I think we all understand why they would go with Landbridge, right? Again, Landbridge has the land. You need to go with them. But they you said they went behind Waterbridge's back, did Landbridge and then decided to do it all through Waterbridge. Devon had I believe they had an internal operation that they could have done this. They could have tried to find a third party. Why does Devon choose to go with Waterbridge here? >> Why? Because they have the they have the space. >> I mean, why do they choose not to contract with Waterbridge or >> No. Why does Devon choose to use Waterbridge for the pipelines, right? Because Devon could I think Devon had internal operations. They could have tried to do it themselves. They they had to deal with Lambridge. They could have tried to get They chose Waterbridge. So, why do they choose Waterbridge and they take equity, >> right? Right. Well, you know, probably because they own 20% of it and have a vested interest in seeing it do well, >> but they got the 20% from choosing Waterbridge, right? So, they did still have to >> I think it was probably committed committed um committed assets at one point. Okay. In the history. >> Okay, that's good. Uh let's go to let's go to something else just elephant in the room. We mentioned the Lambridge deal a little bit, right? And I you mentioned how hey there's a lot of customers here in Waterbridge stock. Uh, so I if Lambridge is getting favored, they're going to have a big problem and you don't want your but I think people are going to read the S1 and they're going to quickly jump and say, "Hey, there's the Landbridge relationship. I've got worries there. Fivepoint is the sponsor here. There's the tax receivable agreement. Uh, Fivepoint has other assets in the industry just like there's a lot of potential for conflicts of interest here. So that is kind of the elephant in the room when you look at this business. How do you think about all of that?" Well, the way I mean it's fivepoint is this is the controlling sponsor but the but the the funds were different funds in in waterbridge and landbridge and so they've been managing this conflict for a long time and the way they've done it is first by setting up policies where if it's a low-level conflict here are the policies and then um if it's a higher level conflict they they set up in independent conflict committees made up by the shareholders of each of the funds um to get together and like and work them out. And so they've been managing this for for a long time and they've done it well and I I think they'll continue to do it in the future. Plus you have Devon in Waterbridge and maybe you know Diamond back at some point if they ever merge deep blue into into Waterbridge. So weird risk here when you read the S1 and you mentioned it earlier as well. A lot of the business is taking water from New Mexico where it is difficult to permit permit water assets, taking it from New Mexico and bringing it across state lines into Texas where it's easy to get uh where it's easy to get permits, right? That's a ton of the business. You can read the S1 and there's all these arrows going from like the middle of New Mexico right into Texas, >> right? >> Is there a regulatory risk here in one of two ways? either, hey, New Mexico gets a lot easier on permitting, so a lot of this infrastructure that's designed to take water out of New Mexico into Texas is kind of excess capacity. Or the other way, Texas says, "Oh my gosh, we're having, you know, early in the fracking and disposing of water, people are putting water into fault lines and causing many earthquakes and stuff." Texas starts saying, "Oh my gosh, we need to regulate this. We're having risks of earthquakes. We're having environmental risk." Is there any risk in that regulatory because they're almost regulatory arbitrageing if that makes sense. Is there any risk in one coming down, one coming up? >> Well, Texas is so the initial saltwater disposal walls when the fracking industry was created, they would put it into deep deep water wells, which is basically old vertical walls that were kind of empty. And so they put the water kind of deep formations and that caused a lot of the seismic activity that that fracking is known for. And so they stopped doing that. And then they then they put them into shallow disposable walls that are slightly above the form the the um the mineral formations. And a lot of in the industry would use four disposal walls per section where Landbridge or Waterbridge throughout their history has used one. And Water Bridg's philosophy is that if you underpressurize your disposal well, um the it can it can last, you know, almost almost forever. They have some that are over a decade old and you run less risk of having an environmental issue where it blows out a well and comes out on the surface or if or you interfere with surrounding neighbors EMP operations. So that's been like their practice. the rest of the and but it's expensive practice because it requires you to have four times the amount of of of um floor space than than the industry was was using. Okay. Um some of those issues have come up. You know, they they've blown out some some some disposal wells and it's caused some environmental damage, not water bridge, but the industry. Um, some of the wells have have been overpressurized to the point where they've um interfered with oil and gas production of surrounding neighbors and there's some lawsuits going on there. The state of Texas got involved in 24 and changed the regulations. So, not only do they permit the volume of water that can go into a disposal, but they also permit the pressure of it. And Waterbridge claims that they've helped write those regulations. And so basically they've increased the regulations to bring the rest of the industry up where water bridge was already at. Okay. So that's I don't think you're going to see um any more regulation from the Texas side because they've already made like a very big change. >> By the way, I totally believe Waterbridge when they say that because one of the things that jumped out to me via S1 is Waterbridge notes that they they are responsible for roughly 40% of the water injection permits in Texas and New Mexico. And that just blew my mind. like that that's so much of it by one company. So I totally believe they have a big hand in any regulation that's happening there >> and they have a good they do it better if you see them in person which I hope they have an analyst day we can get to that but there is a slide where they have um the pore space and it's like in red where it's like over the overpressurized areas >> with with the four the four red. Yeah, I know exactly what you're talking about like when they if you if you see in the IPO process, you know, they were able to do that like a time lapse one. It was pretty amazing to see. And so if they ever do an analyst day, which I hope hopefully they do, it'd be nice to see that. But with respect to New Mexico, New Mexico you have federal land, you have private land, and you have state land. And you know, and it's and they're all kind of intermixed. And so, um, you know, you got like three levels of regulations there to deal with. And so it may, you know, it may be difficult even if they wanted to make a change to actually get stuff done. And and even if they did make a change, I don't know if the operators would trust it because, you know, changes have been made in the past and then two years later you have a new administration and they revert back to to it. And these guys, you know, the EMP operators, they they want it to, you know, they have an oil wall. It's going to go for a decade, decade and a half. you know, they want the problem to be to be gone. So, you know, even if people start making noise about softing regulations in New Mexico, a it's probably very hard to do and b I don't know if anybody would trust it. >> Perfect. Uh, you know, I one thing that when I started looking at this company, you will hear energy bulls a lot. We'll talk about how the perian is getting gassier. the the tier one stuff has been kind of tapped out. It basically calling for perian oil output to decline. Even if money invested goes up there, they're saying, "Hey, peran oil uh per is going to climb." And look, all of all of this is Texas and New Mexico water assets for the most part, right? So, I just want to ask you like if the energy bulls are right, if the Perian is not the growth engine for the world's oil anymore, how does that kind of play into Water Bridg's hands or not play into it, I guess? Well, the Pervian's large. It's not just it's not just the Delaware basin. And so I think that within the Delaware basin, there's going to be oil output for for a long time. And it's the lowest cost part of the of the Peria. And so, you know, you can definitely see how other basins in the US, you know, if the US is going to decline in it in its oil production volume, it's definitely going to happen in other places. It could happen in parts of the Verian, but the Delaware is going to be the last place for it to decline. >> Well, you can also correct me, but I think one of the reasons it's declining is because the easiest stuff has gotten tapped. So, the newer stuff is gassier. It is heavier water cuts. So, even if you're seeing the overall volume of oil going down, there's the chance for these guys that they're going to actually see water production go up. Now, you can correct. >> Yeah, you will see water production go up. I mean, it's right now in it the water the water production of a of a well goes up as the well ages. So, you have that. Um, but I was, you know, I was reading today that they expect the the water cuts initially to be a at a six in by 2030 whereas right now it's at a four. So, like >> that's four barrels of water for every one barrel of oil and going up to six barrels of water for every one barrel of oil. >> Correct. I mean some areas in the Delaware Basin are are are 10x >> if speaking of energy bulls and bears you know this is all all of this water is coming off because oil is getting produced for the most part right >> where do oil has gone from you know if we were doing this podcast twoish years ago oil is in the 80 per range if we're doing it three years ago oil is in the 90 per range today it's in 60 the 60s the forward curve or in backwardation It's in the mid50s if you go out a year. Where do oil prices needs to go where hey you start seeing some shutins or wells decline and you start saying hey even if the cuts are getting water waterier the you know the volumes just aren't there. Now we do have the MVCs but there's just not going to be any growth. So it's starting to impact water bridge. You know oil's at 100 doesn't matter. Oil's at 90 doesn't matter. Actually great for them but there's got to be some price where you start seeing volumes really decline. Where does that really kick in? >> Well, I think that ongoing production, I don't think you'll see shutins unless you have like a COVID situation where demands demand stops. Like the ongoing production will will keep going. Um it's the new drilling that that slows down and you're already seeing a lot of new drilling slow down. So, you know, that that's happening, but the produced water volume is still holding up. So if you look at I mean again we don't have water bridges um rep uh first report but if you look at secure for example you their recount was down 15% last quarter and their produced water volumes were down 3%. And there was there was a lot of um facility shutdowns that may may have affected that. So, you know, it could have just as easily been flat. So, >> if we earlier we talked about, hey, near-term IBIDA, let's call it 450 million, >> three to five year outbid, let's call it 900 million. The path to basically doubling IBIDA over the next couple years. How much of that is organic in terms of pricing and volumes versus organic in terms of building out, you know, that billion plus in capex we talked about at 30% unlevered versus >> inorgan they got 10 10 year contracts with minimum volume commitments you know at probably growing volumes at 10%. You know and then and then pricing layers in so I think you're pretty you're pretty well covered. And then um the the gassy region that that you know the sour gas region that hasn't been developed yet um I heard that that there's capital being committed to that and you know get oil prices in the 40s it's still going to go because people have already started signing up for for you know minimum volume you commit mix and processing the sour gas and you know that would be you know another project that that water bridge will will do to service the water needs of that area which you know should be coming you know should be announced pretty shortly and I I can see that generating cash flow by 28 >> if if we're talking 28 it's probably more a 29 or 38 thing but let's say 900 million in IBA right >> can you break down what's the I mean this there are pipelines there are real physical assets here what is kind of the maintenance capex required for that 900 million >> yeah it's g I kind of look um secure as a as a as a comp because just because we don't have as much data on on this one and you know secure keep in mind that 30% of their business is pipelines and so they do have some pipelines in their business too like that which is like oil takeaway pipelines that pipelines as much affiliated with the water business although some of their newer growth contracts you know do have some pipelines um and then they have to pay for for space and and their maintenance capex X um has increment you know replacement of force base within it and they're about you 15% of their IBIDA goes to sustaining capex so that would be a pretty good comp here as well. >> Yeah. So I mean on the 900 million IBIDA and obviously there's interest and uh other things but this is a pretty >> 140 maybe so 140 maintenance capbacks on that. This is a very, you know, I I think people hear, oh, assets, they think this, they think there's a lot of maintenance capex. This is a very cash flow rich business as you would expect from a uh as you would expect from a pipeline like that that all the pipeline businesses you put it in the ground and they last 30 years and there's, you know, just >> I mean, you look at you look at Secure and they're doing they're doing the same type of ROIC's. I mean like they of course they have the um they have the pipeline you know the gathering and transportation pipeline in their business but if you look at what they're talking about when they when they deploy capital they're deploying it at um in the waste business they're deploying capital at kind of 25% unlevered IRRs initially with the with the ability to put more volume through that as those businesses grow and so you know they can work those up in the upper 20s in low 30s IRS. >> Let's choose 900 million in uh IBIDA, 140 million in let's make the math really easy and just say 750 million in unlevered free cash flow four to five years out. >> Uh obviously there's a lot of growth projects here in the next couple years that's going to consume a lot of but at some point the great thing about a high business that's growing a lot with not a lot of capex is you're generating just a ton of cash flow. What does capital allocation look like kind of as the growth projects uh as the cash flow kind of starts to exid exceed even what they can put into growth projects? >> Well, I think it depends upon the valuation at the time and I mean I think obviously they would do a you know some nominal dividend in order to check the box for investors that have to have a dividend paying stock in order to invest in it. I would hope that they they don't go too crazy. Like my favorite divi dividend is like the dimminimous but growing ones to check those two boxes and if you need to pay a big one because your stock's overvalue you can do a a special one. But you know these guys are you know they're very they're very uh commercial savvy and they're and they're very financial savvy. So I think you know if their stocks undervalue they're going to be prefilling share repurchases >> and if on that 900 million in Ibida that we kind of said hey you know this goes right all these growth have been they get a couple years out how do you think about multiple valuation at that point just so people kind of know what they're playing for four years five years out >> I mean I think that you look at one of the waste companies that that reported um in the last couple weeks and they have a oil recycling business that they're putting money into pretty significant like four or 500 million and they're talking about a seven-year payback. You know, that business trades at a much higher multiple than what Waterbridge trades at and Waterbridge has what three-year paybacks, you know, so you know, I think people are going to be making the connection and you know, you know where the waste multiples are at there in the mid- teens. I mean, don't take my word for it or don't take Secur's word for it, who's been beating that drum for a long time. You take Waste Connections word for it. Waste Connections is one of the the highest quality municipal waste operators in in the country. And they invested in R360, you know, over over a decade ago. They paid I think they paid like seven and a half times EBID for it when their multiple was was at like maybe seven eight 7.8 times. So, it wasn't, you know, both their multiples were low. And then in 24 they bought 20% of the industry's capacity in Western Canada by buying the secure assets that the competition tribunal forced secure to sell. And uh rumor is they bought a small uh EMP asset in the perian um that was sold by a sponsor in Q1. And so the waste companies definitely see that the attributes of these businesses are similar to theirs if not better than than theirs and they're putting money into this business as well. >> So if I'm just doing that in my head, so you're saying, hey, look, five years out, 900 million in IBIDA. Let's assume that all the free cash flow between now and then goes to growth capex, though I think that's kind of an aggressive assumption. So 900 million IBIDA, 15x multiple if it's kind of the waste multiple. So you're getting to 13 and a half billion of EV. They've got what is it right now? Like two two billion of debt. So you'd get 11 and a half market 11 and a half market cap. >> And you get 11 half market cap. I think they're around three is the market cap post IPO. So you're kind of looking at a three to four bagger on that math. Am I I kind of doing that right in my head? >> Yeah. Yeah. >> Okay. Let let me ask just two push backs on the multiple, right? And I don't think it super matters because you could do the same math that I just did on a 10x and you would still get a pretty solid return over the next few years, but over the next few years, but let me just do uh some push back on the multiple. I mean, I do hear you on the 15X, right? Like these are quality businesses, but I guess the two things I'd point to is waste connections. You mentioned they bought some stuff, but you know, when I think waste, I guess it's permanency of the assets is what I think. people are going to come AGR or whatever a 100 years from now people are going to be you know their trash needs to be taken out. I don't know if the perian is going to be getting drilled in the same way call it 30 years from now. So I I mean maybe but are we is the is the difference between this at 10x and the 15x that waste connection should get is it kind of the questionability of the terminal value of the assets? Does that make sense? Okay, >> I think that well the wells are going to produce for a long time. So over over a decade. So even if you drill if you're drilling 10 years from now, you know, those walls will still still be going. Um but yeah, you say say it deserves a slight a slight discount because because you have a little bit more uh terminal value risk there or maybe the there's there's the u perception that the revenue is a little less resilience because it's tied to oil and gas. >> Yeah. I look I I don't think it's matter. I don't think it crazy matters. But >> yeah, let me finish. But >> yeah, >> you know, okay. So So say say you you you it deserves a little bit of a discount, but then I would say, well, what premium would you give it to it that it doesn't have to pay for the trucks? I mean, look at the ROIC of a municipal waste company. I mean, they're horrible. I mean, you 10% 11%. They're growing. They're growing, but they always have to replace the trucks. like you don't have you don't have the collection assets um that the municipal waste has and so yeah I mean >> are there some attributes of the wa municipal waste companies that I'd like to see in this business yes maybe you know you should get knock it a little bit yes but on the other hand you got to you know with respect to the the the maintenance capex that that you don't have here I mean that's a big premium >> great point great point let me ask you if I put oil prices to the side because we mentioned oil prices you know Perian is going to be producing at 50. Perian is going to be producing. If you said oil prices are going to 10, this probably isn't the the investment for you. But if I put like just dramatic collapse in oil prices to the side, what keeps you up at night about uh about water bridge or alternatively, you know, we talked about a lot of this growth is built in. It's MDC's, it's contract pricing, all this sort of stuff. Again, what breaks this? What keeps you up at night? What could stop that inevitable march to the 900 we talked about where you know if we're recording this on your 10th podcast appearance three years from now we say hey this didn't work out for XYZ reason. Yeah, I think that, you know, some environmental disaster or something like that, a pipeline breaks, you know, you have some, you know, some expensive lawsuit, you know, some some uh remediation work that's real expensive. I mean, that would be that would be a that would be worrisome. You know, I I think that um you know, I don't think it's a long-term risk, but anytime you have something that's complicated with respect to like like this where you have the sister company, Landbridge and Waterbridge, it's always going to be um ripe for short reports to attack it. And so, you know, you may wake up one day and it be down 20% because some short report came out. You know, I don't think that is like a long-term um issue for the business, but you know, it doesn't make it fun in the short term. it on this is completely off the cuff so forgive me for this but on the remediation and pipeline spill I mean I've been involved with pipeline spills before and on the oil side and it's a disaster right it's generally pipeline spills in the ocean but even on the ground it's a disaster oil kills everything it coats everything kills everything if you had a pipeline spill here I mean I understand this water is not potable right you and I aren't going to go drink this water or something but if you had a pipeline >> yeah it's corrosive it's nasty stuff >> it's but would it be as big a disaster as oil or because it's I I mean at its base it's water would it be like hey you know eventually it evaporates and it kind of goes away and it's not as bad like you know an oil spill we're talking hundreds of millions of clean up here if there's a spill is it tens of millions is it single digit millions >> yeah I don't know probably drive a lot of business to their landfill [laughter] >> so if it was their customer that if it was a customer that caused the spill then it would It'd be fantastic. It' be business business generous for them. But >> no, that that is true. Uh I I I was just curious because you know sometimes it does help when you quantify the actual downside. You know I do merger your arbs uh merger you're always worried about the breaking of downside but every now and then you'll have something where it's like hey in between the deal announcement and the deal closed they announced four new contracts for 100 million each. Guess what? The downside used to be 40. Now the downside's 50. And that completely changes the calculus. If the downside here is oil spill alla Exxon Valdez and you know we're talking billions of cleanup costs that's one thing. If a spill here is hey we need to go I don't know take hair dryers and evaporate all this water. >> I think the environmental damage of the Axon you know Valdez in the ocean is probably much more dramatic than it is in the middle of the desert in the most desolate part of the country too. That's exactly one of the many things I was driving to, right? Like it is very desolate pieces of the desert. So maybe a spill can be remediated in a lot of cheaper ways than kind of we think about spill. Yeah. >> I mean oil prices are obviously like the you know the big risk that you want to keep a an eye on. I think that it could be a good thing to have low oil prices in the short term just to prove out the the resilience of of of the thesis, but you know definitely it's tied to oil. Um and then you know the land bridge water bridge um you know common management dual stock kind of structure just makes them susceptible to I mean they have to manage the conflicts well they've done it in the past I think they'll do it in the future but you know you'll have short reports coming out where they you know make some claims. >> Yeah. So, I've probably asked four questions on the potential for conflicts of interest, and I think you've had good answers and they've managed this for years, but you've said it is there. A short report will probably come out at some point highlighting the conflicts of interest on one side or the other. >> They already have. They already >> Oh, really? I I hadn't seen seen >> one. There is one that that came out before Wbridge went public, but yeah. >> Okay. I I will I will go find that. But why why even have these as different businesses? I understand like the it just it strikes me that just the integration would make a lot of sense here. >> Well, the the integration operationally makes a lot of sense which is why they do it. But then, you know, if you look at land royalty companies like Texas Pacific and Landbridge can trade 25 to 40 times like that's that is not going to get appropriately valued within within a water bridge. And so it makes sense to have that separate. >> I I think I hear you though. You know, if you I guess at the same time, if you put these under the same roof and you start you did segment earnings and started breaking them out, everybody would just say, "Oh, you're you know, how are you doing segment pricing?" So, they'd probably have the same the same issues and you'd never get the multiple. But it does strike me that it just seems like these businesses belong together. Well, as a shareholder of both, I kind of like having them separate and, you know, if it makes if it makes people more comfortable, you know, I'm I'm a larger shareholder of Waterbridge. So, >> that's great. Uh, I think we've covered everything I wanted to cover. Anything else you want to talk about or anything a listener should kind of go away thinking about? >> I think we're pretty I think we're pretty good. I mean, you know, the thesis is pretty simple. there's there's a lot of organic growth um within the next few years. Um it wouldn't surprise me if they do an analyst day which I really think is needed because you know right now most of the people that are looking at this are energy investors or midstream investors. Um you want to get the waste guys looking at it. You want to get the journalists looking at it. Um the con the concept of of forcepace is is tough initially to get your arms around. I mean it worked out for me because you know I was invested for years in TPL. I would see the royalties that they would get paid for their produced water business. You know I owned some waste companies. I sat down with the secure guys at a conference and they explained the business to me. And so for me it was a little easier to get because I've had so much exposure to it. But I think landbridge and water bridge like they really need to have an investor day. And you know now that they're both public I I would see I could see them doing that in the in in the next you know two three four months. >> Forget the investor. You know what they needed? They needed you to come on this podcast because I know you came on this podcast for secure uh what 12 15 months ago or whatever and then all of a sudden the trail you mentioned the generalists. How many journalists do you see having uh having they write their letters that they say, "Hey, new position, Secure. It used to be Secure Energy. Now it's Secure Water Solutions." >> Secure's got a nice cadre of uh of um fans on on on Substack and Twitter. Um that, you know, Canadian companies are a little bit different that where you don't have to report um your you being a shareholder unless you're over like 10%. And so, >> yeah, >> there are some there are some pretty clever funds um that I I do know that are within the secure shareholder base that I wish they would um disclose their positions because it would help get a lot more exposure to that company. But you brought up Lambridge on the secure call that we did and Lambridge got um got inbound calls bec because of that. And so that's that that that helped me uh that helped me uh get closer to the management team and probably secure a larger uh allocation of the Waterbridge IPO. So, I have you to thank for that. >> Good for you, man. That's awesome. Cool. Well, hey, Chad, uh, this is great. I'm going to go count up the podcast because if this is the fifth one, we're we're losing the tide for the next one. You've got the the exclusive yet another value podcast shirt coming in the mail, but uh, this is great. Looking forward to chatting soon and looking forward to the next podcast. >> All right, man. Have a good day. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.
Chadd Garcia breaks down WaterBridge's post-IPO value creation story $WBI
Summary
Transcript
You're about to listen to the Yet Another Value podcast. Today's episode is my friend Chad Garcia is on for I think it's the fifth time. He told me it's the fifth time. So, he's got a shirt coming his way. But Chad is awesome. Uh some of his pitches, I mean, look, it it's no surprise. He comes on, he pitches a stock, and then six months later, you see 15 generalists who've gone long the stock on the thesis that Chad pitches. Does great detailed work. He's done great work on this. We're going to talk about Waterbridge. Ticker there is WBI. It's a recent IPO. uh look full see the full disclaimer at the end of this podcast but nothing's investing advice but Chad's done great work we have a really interesting conversation about a really interesting company because there really aren't a lot of public company parallels and I think you'll see that's why maybe there's opportunity here so we're going to get there in a second but first a word from our sponsors this podcast is sponsored by try.com look I've been harping on it for months if you like this podcast you are going to like try.com it is interviews between two bysiders who are talking about stocks they know so It's very similar to this podcast except you know in this podcast one person the guest knows the stock they're talking about and I have nothing no clue and in the try.com interviews two people know what they're talking about so twice as much fun. Look uh I've been harping them for months and I will tell you lots of you have gone checked it out listened to it and the feedback has been fantastic. So it's not just me saying it. It's fellow yet another value podcast listeners saying it. So go to trirtrada.com now and go check it out and see why I'm so excited about it and why I think you will be too. All right. Hello and welcome to the yet another value podcast. With me today, I'm happy to have Chad. I can't remember if it's the third or fourth time, but one of the most popular guests on the podcast, Chad Garcia. Chad, how's it going? >> Good. Good. I think it's I think it's the fifth time. So, >> no way. That means you qualify for the shirt. I should have worn the shirt today. Uh we'll talk about that after the podcast. >> I have my hat in the background, so you know. >> But both of our hairs are both of our hair is on point today, though, so we can't mess that up with a hat. Uh super excited to talk today. This is uh actually one of the most interesting companies I've stumbled on this year. But before we get to it, just disclaimer remind everyone nothing on this podcast investing advice. You can see the full disclaimer at the end of the podcast. So Chad, the company we're going to talk about today is Waterbridge. The ticker is WBI. You have done uh fantastic work on this. So I I I read your Q3 letter. You and I had dinner like the night before this IPOed and we were talking a bunch about it. So I I'm just going to toss it over to you and let you cook. Uh what is WBI and why are they so interesting? Yeah, Waterbridge is the leading processor, cleaner and disposal company of produced water. They primarily operate in the Delaware basin in the in the Perian Basin. And so when oil is is is fracked, you know, some water comes up. Some of that's the water that's used in the fracking process, but most of that is water that was that was seawater that was buried millions of years ago with the organic matter that turned into the oil and gas that that they're extracting in the fracking process. And that produced water they call it flows out with the oil for the as long as the as the oil well flows. And so in the Delaware basin, you get four barrels of produced water for one barrel of oil. So they call that the water cut. And then what they've noticed is that as a well ages, that water cut goes up over time. And then in various areas, you know, some areas just have higher water cuts. So, you know, right now you're starting off with a with a 4 to one water cut. In 2030, you'll likely have a six to1 water cut. And so water is the choke point for oil production. If if you're Exxon and you're developing in the Peran Basin, if you don't have a place to put the water, your production shuts down. And so Waterbridge, which went public a couple months ago, has a vast network of pipelines. But they also have a relationship with Landbridge, a sister company that went public about a year and a half ago that owns a lot of the land where the pore space is located. So the pore space is the geographic formation where the water is deposited and think of that as like a landfill. Perfect. That's a great overview. So just specifically, so you mentioned water bridges handling the handling the water cut from all these uh from this oil and gas you know from the perium from any well that's getting drilled out there and then you mentioned land bridge is kind of where you take the water and you actually inject the water and kind of store it. But I just wanted to so what specifically does waterbridge own in this process that they're kind of handling the water? They own the the pipelines that transport it and then the cleaning facilities that separate the oil because you'll there's going to be oil that's with that's mixed in with this with the sludge and the solids and the and the produced water. And so you separate out the oil and you recover it. You can sell that. It's called skim oil. The solids get removed and deposited into an industrial landfill. So they own some industrial landfills as well. And then the remaining liquids get deposited into the pore space. >> Perfect. So let let's start here. You mentioned they IPOed late September I want to say. So you know like 45 days ago they get picked up by I think 12 brokers pick them up uh with coverage. You know I I'm kind of looking. It looks like seven of them have buys and four of them have neutral something like that. And you know this the stock IPO is at 20 and it's at $24 per share right now. So, I I lay all that out to ask you like when I look at this, I say, "Hey, looks like it's relatively relatively well covered. Looks like the IPO was pretty successful. You know, 20% in uh 45 days. This isn't it's not core wave going up 5x in 30 days, but you know, that's a pretty pretty nice IPO, particularly for like kind of a more state industry. So, just want to ask company well covered, well well reggarded, successful IPO. What are you seeing that the market's missing that you think makes this kind of an alpha opportunity here? Well, it was 11 times over subscribed. So, for an oil company, I think that was a pretty good, you know, it wasn't it wasn't, you know, 20 times over subscribed like, you know, maybe a Circle Internet Group or something. Um, last I counted there was 11 sellside analysts that covered it. I've read eight of the reports. Not one report mentions the parallels of this business to to waste. And you know, you and I, we had a podcast last year on sec on secure. It was called Secure Energy Services at the time. They've subsequently changed their name to Secure Waste Infrastructure Corp. Um, you know, that's that's where I learned a lot about this business, you know, working with them and then also my my investments in the waist base with connections and and GFL. But you know similar situation between the two companies whereas you know secure was covered for for many years by energy services firms. If you look at the economics of their businesses and if you look at some of the modes surrounding the operations they look like waste companies. I mean they have landfills they have some industrial landfills. It doesn't that parallel doesn't get any more cleaner. And then the pore space where you deposit it also has some very similar geographic and regulatory modes the landfill has. Um secure made that connection in the last year they have converted most of the analysts that cover them to waste analysts or general industrial analysts. And so they've been beating on, you know, we're not a energy company. We're a waste company for, you know, a couple years now, but it's in Canada. It's a small cap. Nobody's paying any attention. Landbridge or Water Bridge goes public. You know, they can't go public with with something that's, you know, story that people aren't ready for. So they hire JP Morgan's energy bankers. They do a good job getting it public. Um the the pitch kind of looks like a mid-stream pitch whereas you know like you know a mid-stream pipeline business might trade 9 10 11 times. You know maybe this one has a little bit better economics to it a little higher return maybe should go for a little bit of a premium but you know nobody's yet making the waste parallels and you know just like secure you know has has been making that argument. Um, Waterbridge is management. They report in a couple weeks. They understand the parallels of their business to the waste industry. They are going to be beating the drum, too. And they're likely going to have a much bigger megaphone than the Secure Guys did um because they're an American company and, you know, they'll get a little bit more exposure. But right now all the analysts that cover it are are mid-stream analysts and they're looking at it with that view and not looking at it with the with a waste view that so if I was kind of summarizing what you're saying you're saying hey look this IPOed and these guys knew it right they wanted to go public this IPOed and people were taking as you said an MLP energy infrastructure viewpoint and you think over time and that got in a fine multiple right we can talk to multiple trading but like a low double digit multiple right now I think is kind of what and what you're saying is hey This has one of the reasons this is an alpha opportunity is this has a lot more in common with the waste management industry and the waste management industry probably trades for a mid- teams even so you think there is a lot of kind of multiple expansion as the company delivers people get to understand the story all that sort of stuff am I am I kind of summarizing that correctly >> well I think they're going to have ample growth just within their own within their business and so from my risk management perspective I'm like okay on earnings growth by itself this is you know call it a double in five years you know I can underwrite that but it's traded nine times evida waste waste companies traded 15 times I evbida you get the earnings growth plus the multiple expansion and that's where things get really interesting well let's talk about uh the earnings growth so why don't we lay out kind of look they just IPOed in September this podcast is a little bit bit different to prep for because there is the S1 and then there's nothing else public from these guys yet right they haven't done They're in the ear the post IPO blackout period. We don't have an earnings call. We don't have Q earnings. So, >> well, the post IPO blackout period ended, but it ended right into the earnings blackout. Also, [laughter] >> blackout's a blackout. Just uh I'm not going to say my college days, but you know, maybe every now and then, my Marty GR days. Um what are you kind of forecasting? Let's lay out what is the valuation look like on a 2025 or a next 12 months number, whatever you want. Let's lay out that valuation and then we can use it to build to like kind of out years. >> Well, over 70% of the revenues contracted and a lot of the recent contracts they've been getting they they've announced like three large projects that they're spending capital on and the three large projects um are minimum volume contracts and and what's interesting is that the pricing of these contracts are well above kind of the spot rate. So the spot rate called 65 cents a barrel for processing. The last contract that they signed was was just over a dollar. And so that and and that was a 10 10 15 year contract. And so that does give you um some indication that the EMP companies are worried about having an outlet for the for their water in the future. And if they can lock it up for a decade, maybe a decade and a half, then they'll pay a premium for that. But um on the minimum volume contracts alone their volume should increase you know I call it low double digits. So say like 10%. But they can also pick up more business just within their existing network that that's not fully utilized. Nobody sets minimum value contracts minimum volume contracts at the level that they think they're going to do at the max level. They kind of set it below. So there's probably incremental volumes from those contracts that are going to flow in. And then, you know, they have, you know, three large contracts already um disclosed that they're spending capital on. One of them's probably ripe for for phase 2 expansion. I would I would imagine that that would be announced within the coming months. And so there there's a lot of growth coming their way. So I it's easy to to get to a a mid teens to to high teens volume growth and then again you get pricing that that's going to be flowing through you know and and you know with probably not much incremental cost to it and so from an earnings growth perspective it's going to be even it should be even nicer >> but if we could just quant so uh just kind of next 12 months what what do you kind of think the the near-term ebidal looks like? >> Yeah. So like it so so 25 450 IBIDA I think would be very conservative and then you just compound that at you know 15 to 20% for the next three years. >> Yep. So about 450 in Ibida and you could be talking about if if I took it a little further 900 million Ibida isn't out of the question by before 2030 if I'm kind of doing that math in my head correctly. >> Yeah. Yeah. Yeah. Yeah. And then from an incremental forcebased perspective they've got you know they'll they'll probably do 2.8 8 million barrels a day and 25 and they've got incremental pore space of 6 million barrels a day that they could that they have access to which is probably worth depending upon pricing between a billion and a billion four of incremental IBIDA and so you know that's you can see how they can get to a billion and a half two billion of ibida um just within just with the pore space that they currently have and that's not including some some pore space that Landbridge just bought. If you look at Lambridge's press release, they they bought some more pore space. They paid a little over $200 million for it. They haven't quantified how much incremental pore space is yet. So hopefully we'll get that on the earnings call, but you know, I think that there is going to be a need for the for the pore space in the in the perian because the water cuts go up over time. The areas where they're going to be drilling in the in the near future going to have higher initial water cuts. um they have plenty of incremental pore space and pipeline to get it there and so I think it's just a matter of speed rather you know as as opposed to like how much growth they end up with. So I don't I you know it's a matter of how quickly it happens. I >> I want to come back to that in a second but just to quantify. So the stock as you and I are talking about $24 per share. You can correct me if I'm wrong but I've got the enterprise value around $4 billion at these prices. >> Yeah. >> Okay. And and we just said 450 in Ibida. So people >> probably 43 43. >> So people can do that math that slightly under 10 times around nine times IBIDA on the near-term numbers Chad is talking about and then if you go out you know you you quickly get to 5x ebida if and when all this growth gets delivered. Let's talk about that growth. So you know these guys the returns on invested capital here are I don't want to say insane but they're really effing good right? You're talking about multiund million dollar projects, these pipelines, all the space and everything and they're getting 20% plus returns on invested capital on lever, right? 2530 is not out of the question. Yeah, that that billion the billion the billion to billion four of of incremental pore space incremental ebid of the pore space that they have would probably cost them three to three and a half billion dollars to realize and and that's like and that's >> if they're it's like a platform and so like so you know you have speedway project right now which they're probably getting like you know like a three-year payback on that you know on a level right >> um that is running right through a sourass region that's going to be developed shortly. There's already minimum volume contracts on processing of that sour gas. Like that's right for an expansion of of of the Speedway pipeline. I I would imagine if when you're expanding a pipeline as opposed to like to initially putting one in, it's probably two-year payback. >> But that's what So that's what I want to ask because these returns are phenomenal. like these are phenomenal for infrastructure assets, right? Like uh so I'm gonna >> but they're not they're not paying for the pore space like as you you know you would do like this. We're we'll talk about the poor space when we talk about Lambridge in a second, but just the returns of their infrastructure projects are phenomenal. And and you know, I'll bring up this a couple times, but I I've done a little bit of work on midstream pipelines, especially offshore oil and gas pipelines. And offshore, you know, those are some of the those are pristine assets. And when these guys build, they build and they there's lots of, you know, you're building things 3,000 miles under the sea. Uh the returns there are like 20 to 25%. So these guys are actually getting better returns. Now as you said there's no poor space but I just went why can they get these types of returns because in my mind billions of capital 30% returns it people try to compete that away right and we can talk all the ways people can but just high level why do they kind of have the rights to get such great returns on pretty significant amounts of capital. >> Well I think it's their I think it's the relationship with Lambridge. It's like look at where look at where a lot of this water is flowing. A lot of this water is flowing out of New Mexico and and into Texas. And if if you're going from like the north south part border, I mean the on um the western part of that is is TPL property which Landbridge went and kind of a lot of the the acres there are are checkerboarded and so so TPL had a big area with checkerboard. Landbridge went and bought up the rest of the checkerboard and and entered into an agreement with with them. And so they've got that area locked up. There's a a ranch just east of that that was one of the initial areas where they where they would put in um shallow w um saltwater disposal wells that's kind of overpressurized. And so you there's not going to be any incremental pore space there. Um and then there's a ranch next to that where there's no no wells on it currently. and then you're back to landbridgeidge property and then then it starts to go up into the panhandle. And so anytime you want to cross land, um, a land owner is going to want to take a a a toll charge on on on the water that's kind of crossing over their land. And so it's not only having like a a massive pipeline network, but it's having one that's kind of efficient where you can avoid having to cross property where you have to pay the let me uh so let's go to Landbridge right now, right? Because I think that's the first thing when when I read this as one when you and I first started talking about it, it's the first thing that jumps out to you. They have a sister company, Landbridge. And for those who don't know, Chad, and I know this because we've talked, I've read your letters, Chad was very early on the Landbridge story, and the stock is up even after a recent pullback. Uh what 150% since it IPOed uh 17 and it's at 60 maybe today. >> Yeah. So the reason uh I I first started, my ears perked up when you mentioned Water Bridges. I was like, "Oh, Chad pitched Landbridge. This guy knows." But I think there is a question. Landbridge is Water Brbridge sister company, right? They are sister companies. You you can hear it in the bridge. They have the same controlling shareholder, all this sort of stuff. >> No, no, no, no, no. They have the same sponsor, but the shareholders are different. And that and >> my fault. This is the same sponsor who does own a ton of both these, right? But I I think the question, my first question when you see this is you said, "Hey, why can they charge this rates?" And it's because they cross the land and you know, the corner store at the corner of a really great, you know, 86 and lex, it >> gets a ton of foot traffic doesn't mean that it's going to make a lot of economic profit because guess what? the landlord keeps charging them every time the landlord is taking pricing and they're going to keep charging kind of for the marginal customer. Uh here I guess my first push back would be hey yes I know they've got a sister company in Landbridge but why isn't Landbridge ultimately the one who's saying hey the poor space and the land is the critical thing we're going to keep charging you keep charging and we get all the economic profit not you the pipeline >> I think I think it's having both the pipelines and a pipeline network that provides redundancy so if you're if you're an EMP operator and you have one water company and they have one pipeline so one amount of pore space like that might work for a few years but what happens if there's something that's that goes wrong with the with the saltwater disposal wall it loses its permit you know in years you know 5 6 7 8 9 10 it could have a force majure so you want to have a a vast network with with multiple access points for saltwater disposal walls and so it's having the whole network you know plus the pore space that gives it its real value. And so, you know, both of these entities are are are creating value and you know, Landbridge is is is uh you know, get gets paid a nice royalty fee. You know, some would some would say might a little bit above market, but you know, I think it's I think it's within market now. But uh over time you know as poor space is used up you know the rates that water bridges that water bridge charges and the rates that land bridge charge should you know should both go up in tandem. But you know there is a there is a risk that that um waterbridge could privilege landbridge and some economics kind of squeak out there. But keep in mind that, you know, Devon Energy owns 20% of Waterbridge and is a big customer. You know, I I doubt Devon would like to see, you know, some of their economics as a shareholder of Waterbridge squeak out to Lambridge and they're a big customer and so like there's a stick there, right? >> I'm I'm going to come to Devon in a second. I actually we'll get there in a second. I did look it up. Devon is mentioned 135 times in the S1. So I I really do want to talk about that, but I want to ask one other question. Right. So, Landbridge has the land. They are the landlord who has the who owns the property at the corner. You kind of can't get around that land, right? You've got the land. That's a great spot. The the other way returns here could get competed away is yes, Waterbridge builds the pipeline, but somebody else could come build the pipeline, right? A lot of these are new builds or expansions and somebody else could come and say or even, you know, Devon, Exxon Mobile, these customers, they've got huge balance sheets. Exon Mobile owns and knows how to operate PIP pipelines. They could say, "Hey, Waterbridge is about to spend $3 billion for a billion dollars in Ebida. Why don't we just do that ourselves?" Or why don't we go to name your other water operator here and say, "Hey, why don't you guys spend $3 billion for 900 million in EVO, right? Like take that take that return rate down and start having people compete against each other." So my second question is >> yes Devin did enter to um um basically a call option on pore space type agreement with with landbridge and so they you know the history of this is the operator goes to the water company the water company goes and finds the land owner that's the the history of the industry but you know Devon who owns part of waterbridge um is worried about access to poor space in the future and they went and and res like forward contracted core space with landbridge directly, you know, so they went around Waterbridge, but in doing so they did commit to use Waterbridge as as the deliverer of it. Um but you know to your point like yeah these companies can um you know have balance sheets and like have ran water businesses in the past but but the trend is for the large operators to divest of their water businesses because you know you want some scale right? So, you want to be able to handle the water of of operators that surround your property, right? But if you're, you know, if Exxon is is, you know, has a water asset and you're some small independent company and they say, "Hey, you can use our water asset, if pore space becomes tight, who do you think's going to get squeezed out, right? The small operator." And so, it just makes much more sense for these water companies to be independent. I mean if you look at Diamondback um had a water business called Rattler that they spun out and you know it traded it traded at a horrible multiple because you know they couldn't maximize the value because of that that dilemma and they ended up selling it to 5point which is the sponsor behind behind waterbridge and and landbridge and that that assets in the is in the Midland basin. Now, you know, I do think that that asset, you know, would work well in Waterbridge and ultimately you you you know, you may see it merge with Waterbridge, but to my point, you know, if Waterbridge is is getting mistreated and Landbridge is getting privileged, I mean, how happy do you think Diamondback, who owns who owns a good chunk of D Blue, that asset, um would be and wait in line to kind of merge these assets together? You know, I I think that there's I think that there's plenty of um people within the Waterbridge shareholder base that are also customers with big sticks just to make sure that everybody's treated fairly. >> Let me ask this question in different the Devon deal. We we mentioned that multiple time and now I I think we all understand why they would go with Landbridge, right? Again, Landbridge has the land. You need to go with them. But they you said they went behind Waterbridge's back, did Landbridge and then decided to do it all through Waterbridge. Devon had I believe they had an internal operation that they could have done this. They could have tried to find a third party. Why does Devon choose to go with Waterbridge here? >> Why? Because they have the they have the space. >> I mean, why do they choose not to contract with Waterbridge or >> No. Why does Devon choose to use Waterbridge for the pipelines, right? Because Devon could I think Devon had internal operations. They could have tried to do it themselves. They they had to deal with Lambridge. They could have tried to get They chose Waterbridge. So, why do they choose Waterbridge and they take equity, >> right? Right. Well, you know, probably because they own 20% of it and have a vested interest in seeing it do well, >> but they got the 20% from choosing Waterbridge, right? So, they did still have to >> I think it was probably committed committed um committed assets at one point. Okay. In the history. >> Okay, that's good. Uh let's go to let's go to something else just elephant in the room. We mentioned the Lambridge deal a little bit, right? And I you mentioned how hey there's a lot of customers here in Waterbridge stock. Uh, so I if Lambridge is getting favored, they're going to have a big problem and you don't want your but I think people are going to read the S1 and they're going to quickly jump and say, "Hey, there's the Landbridge relationship. I've got worries there. Fivepoint is the sponsor here. There's the tax receivable agreement. Uh, Fivepoint has other assets in the industry just like there's a lot of potential for conflicts of interest here. So that is kind of the elephant in the room when you look at this business. How do you think about all of that?" Well, the way I mean it's fivepoint is this is the controlling sponsor but the but the the funds were different funds in in waterbridge and landbridge and so they've been managing this conflict for a long time and the way they've done it is first by setting up policies where if it's a low-level conflict here are the policies and then um if it's a higher level conflict they they set up in independent conflict committees made up by the shareholders of each of the funds um to get together and like and work them out. And so they've been managing this for for a long time and they've done it well and I I think they'll continue to do it in the future. Plus you have Devon in Waterbridge and maybe you know Diamond back at some point if they ever merge deep blue into into Waterbridge. So weird risk here when you read the S1 and you mentioned it earlier as well. A lot of the business is taking water from New Mexico where it is difficult to permit permit water assets, taking it from New Mexico and bringing it across state lines into Texas where it's easy to get uh where it's easy to get permits, right? That's a ton of the business. You can read the S1 and there's all these arrows going from like the middle of New Mexico right into Texas, >> right? >> Is there a regulatory risk here in one of two ways? either, hey, New Mexico gets a lot easier on permitting, so a lot of this infrastructure that's designed to take water out of New Mexico into Texas is kind of excess capacity. Or the other way, Texas says, "Oh my gosh, we're having, you know, early in the fracking and disposing of water, people are putting water into fault lines and causing many earthquakes and stuff." Texas starts saying, "Oh my gosh, we need to regulate this. We're having risks of earthquakes. We're having environmental risk." Is there any risk in that regulatory because they're almost regulatory arbitrageing if that makes sense. Is there any risk in one coming down, one coming up? >> Well, Texas is so the initial saltwater disposal walls when the fracking industry was created, they would put it into deep deep water wells, which is basically old vertical walls that were kind of empty. And so they put the water kind of deep formations and that caused a lot of the seismic activity that that fracking is known for. And so they stopped doing that. And then they then they put them into shallow disposable walls that are slightly above the form the the um the mineral formations. And a lot of in the industry would use four disposal walls per section where Landbridge or Waterbridge throughout their history has used one. And Water Bridg's philosophy is that if you underpressurize your disposal well, um the it can it can last, you know, almost almost forever. They have some that are over a decade old and you run less risk of having an environmental issue where it blows out a well and comes out on the surface or if or you interfere with surrounding neighbors EMP operations. So that's been like their practice. the rest of the and but it's expensive practice because it requires you to have four times the amount of of of um floor space than than the industry was was using. Okay. Um some of those issues have come up. You know, they they've blown out some some some disposal wells and it's caused some environmental damage, not water bridge, but the industry. Um, some of the wells have have been overpressurized to the point where they've um interfered with oil and gas production of surrounding neighbors and there's some lawsuits going on there. The state of Texas got involved in 24 and changed the regulations. So, not only do they permit the volume of water that can go into a disposal, but they also permit the pressure of it. And Waterbridge claims that they've helped write those regulations. And so basically they've increased the regulations to bring the rest of the industry up where water bridge was already at. Okay. So that's I don't think you're going to see um any more regulation from the Texas side because they've already made like a very big change. >> By the way, I totally believe Waterbridge when they say that because one of the things that jumped out to me via S1 is Waterbridge notes that they they are responsible for roughly 40% of the water injection permits in Texas and New Mexico. And that just blew my mind. like that that's so much of it by one company. So I totally believe they have a big hand in any regulation that's happening there >> and they have a good they do it better if you see them in person which I hope they have an analyst day we can get to that but there is a slide where they have um the pore space and it's like in red where it's like over the overpressurized areas >> with with the four the four red. Yeah, I know exactly what you're talking about like when they if you if you see in the IPO process, you know, they were able to do that like a time lapse one. It was pretty amazing to see. And so if they ever do an analyst day, which I hope hopefully they do, it'd be nice to see that. But with respect to New Mexico, New Mexico you have federal land, you have private land, and you have state land. And you know, and it's and they're all kind of intermixed. And so, um, you know, you got like three levels of regulations there to deal with. And so it may, you know, it may be difficult even if they wanted to make a change to actually get stuff done. And and even if they did make a change, I don't know if the operators would trust it because, you know, changes have been made in the past and then two years later you have a new administration and they revert back to to it. And these guys, you know, the EMP operators, they they want it to, you know, they have an oil wall. It's going to go for a decade, decade and a half. you know, they want the problem to be to be gone. So, you know, even if people start making noise about softing regulations in New Mexico, a it's probably very hard to do and b I don't know if anybody would trust it. >> Perfect. Uh, you know, I one thing that when I started looking at this company, you will hear energy bulls a lot. We'll talk about how the perian is getting gassier. the the tier one stuff has been kind of tapped out. It basically calling for perian oil output to decline. Even if money invested goes up there, they're saying, "Hey, peran oil uh per is going to climb." And look, all of all of this is Texas and New Mexico water assets for the most part, right? So, I just want to ask you like if the energy bulls are right, if the Perian is not the growth engine for the world's oil anymore, how does that kind of play into Water Bridg's hands or not play into it, I guess? Well, the Pervian's large. It's not just it's not just the Delaware basin. And so I think that within the Delaware basin, there's going to be oil output for for a long time. And it's the lowest cost part of the of the Peria. And so, you know, you can definitely see how other basins in the US, you know, if the US is going to decline in it in its oil production volume, it's definitely going to happen in other places. It could happen in parts of the Verian, but the Delaware is going to be the last place for it to decline. >> Well, you can also correct me, but I think one of the reasons it's declining is because the easiest stuff has gotten tapped. So, the newer stuff is gassier. It is heavier water cuts. So, even if you're seeing the overall volume of oil going down, there's the chance for these guys that they're going to actually see water production go up. Now, you can correct. >> Yeah, you will see water production go up. I mean, it's right now in it the water the water production of a of a well goes up as the well ages. So, you have that. Um, but I was, you know, I was reading today that they expect the the water cuts initially to be a at a six in by 2030 whereas right now it's at a four. So, like >> that's four barrels of water for every one barrel of oil and going up to six barrels of water for every one barrel of oil. >> Correct. I mean some areas in the Delaware Basin are are are 10x >> if speaking of energy bulls and bears you know this is all all of this water is coming off because oil is getting produced for the most part right >> where do oil has gone from you know if we were doing this podcast twoish years ago oil is in the 80 per range if we're doing it three years ago oil is in the 90 per range today it's in 60 the 60s the forward curve or in backwardation It's in the mid50s if you go out a year. Where do oil prices needs to go where hey you start seeing some shutins or wells decline and you start saying hey even if the cuts are getting water waterier the you know the volumes just aren't there. Now we do have the MVCs but there's just not going to be any growth. So it's starting to impact water bridge. You know oil's at 100 doesn't matter. Oil's at 90 doesn't matter. Actually great for them but there's got to be some price where you start seeing volumes really decline. Where does that really kick in? >> Well, I think that ongoing production, I don't think you'll see shutins unless you have like a COVID situation where demands demand stops. Like the ongoing production will will keep going. Um it's the new drilling that that slows down and you're already seeing a lot of new drilling slow down. So, you know, that that's happening, but the produced water volume is still holding up. So if you look at I mean again we don't have water bridges um rep uh first report but if you look at secure for example you their recount was down 15% last quarter and their produced water volumes were down 3%. And there was there was a lot of um facility shutdowns that may may have affected that. So, you know, it could have just as easily been flat. So, >> if we earlier we talked about, hey, near-term IBIDA, let's call it 450 million, >> three to five year outbid, let's call it 900 million. The path to basically doubling IBIDA over the next couple years. How much of that is organic in terms of pricing and volumes versus organic in terms of building out, you know, that billion plus in capex we talked about at 30% unlevered versus >> inorgan they got 10 10 year contracts with minimum volume commitments you know at probably growing volumes at 10%. You know and then and then pricing layers in so I think you're pretty you're pretty well covered. And then um the the gassy region that that you know the sour gas region that hasn't been developed yet um I heard that that there's capital being committed to that and you know get oil prices in the 40s it's still going to go because people have already started signing up for for you know minimum volume you commit mix and processing the sour gas and you know that would be you know another project that that water bridge will will do to service the water needs of that area which you know should be coming you know should be announced pretty shortly and I I can see that generating cash flow by 28 >> if if we're talking 28 it's probably more a 29 or 38 thing but let's say 900 million in IBA right >> can you break down what's the I mean this there are pipelines there are real physical assets here what is kind of the maintenance capex required for that 900 million >> yeah it's g I kind of look um secure as a as a as a comp because just because we don't have as much data on on this one and you know secure keep in mind that 30% of their business is pipelines and so they do have some pipelines in their business too like that which is like oil takeaway pipelines that pipelines as much affiliated with the water business although some of their newer growth contracts you know do have some pipelines um and then they have to pay for for space and and their maintenance capex X um has increment you know replacement of force base within it and they're about you 15% of their IBIDA goes to sustaining capex so that would be a pretty good comp here as well. >> Yeah. So I mean on the 900 million IBIDA and obviously there's interest and uh other things but this is a pretty >> 140 maybe so 140 maintenance capbacks on that. This is a very, you know, I I think people hear, oh, assets, they think this, they think there's a lot of maintenance capex. This is a very cash flow rich business as you would expect from a uh as you would expect from a pipeline like that that all the pipeline businesses you put it in the ground and they last 30 years and there's, you know, just >> I mean, you look at you look at Secure and they're doing they're doing the same type of ROIC's. I mean like they of course they have the um they have the pipeline you know the gathering and transportation pipeline in their business but if you look at what they're talking about when they when they deploy capital they're deploying it at um in the waste business they're deploying capital at kind of 25% unlevered IRRs initially with the with the ability to put more volume through that as those businesses grow and so you know they can work those up in the upper 20s in low 30s IRS. >> Let's choose 900 million in uh IBIDA, 140 million in let's make the math really easy and just say 750 million in unlevered free cash flow four to five years out. >> Uh obviously there's a lot of growth projects here in the next couple years that's going to consume a lot of but at some point the great thing about a high business that's growing a lot with not a lot of capex is you're generating just a ton of cash flow. What does capital allocation look like kind of as the growth projects uh as the cash flow kind of starts to exid exceed even what they can put into growth projects? >> Well, I think it depends upon the valuation at the time and I mean I think obviously they would do a you know some nominal dividend in order to check the box for investors that have to have a dividend paying stock in order to invest in it. I would hope that they they don't go too crazy. Like my favorite divi dividend is like the dimminimous but growing ones to check those two boxes and if you need to pay a big one because your stock's overvalue you can do a a special one. But you know these guys are you know they're very they're very uh commercial savvy and they're and they're very financial savvy. So I think you know if their stocks undervalue they're going to be prefilling share repurchases >> and if on that 900 million in Ibida that we kind of said hey you know this goes right all these growth have been they get a couple years out how do you think about multiple valuation at that point just so people kind of know what they're playing for four years five years out >> I mean I think that you look at one of the waste companies that that reported um in the last couple weeks and they have a oil recycling business that they're putting money into pretty significant like four or 500 million and they're talking about a seven-year payback. You know, that business trades at a much higher multiple than what Waterbridge trades at and Waterbridge has what three-year paybacks, you know, so you know, I think people are going to be making the connection and you know, you know where the waste multiples are at there in the mid- teens. I mean, don't take my word for it or don't take Secur's word for it, who's been beating that drum for a long time. You take Waste Connections word for it. Waste Connections is one of the the highest quality municipal waste operators in in the country. And they invested in R360, you know, over over a decade ago. They paid I think they paid like seven and a half times EBID for it when their multiple was was at like maybe seven eight 7.8 times. So, it wasn't, you know, both their multiples were low. And then in 24 they bought 20% of the industry's capacity in Western Canada by buying the secure assets that the competition tribunal forced secure to sell. And uh rumor is they bought a small uh EMP asset in the perian um that was sold by a sponsor in Q1. And so the waste companies definitely see that the attributes of these businesses are similar to theirs if not better than than theirs and they're putting money into this business as well. >> So if I'm just doing that in my head, so you're saying, hey, look, five years out, 900 million in IBIDA. Let's assume that all the free cash flow between now and then goes to growth capex, though I think that's kind of an aggressive assumption. So 900 million IBIDA, 15x multiple if it's kind of the waste multiple. So you're getting to 13 and a half billion of EV. They've got what is it right now? Like two two billion of debt. So you'd get 11 and a half market 11 and a half market cap. >> And you get 11 half market cap. I think they're around three is the market cap post IPO. So you're kind of looking at a three to four bagger on that math. Am I I kind of doing that right in my head? >> Yeah. Yeah. >> Okay. Let let me ask just two push backs on the multiple, right? And I don't think it super matters because you could do the same math that I just did on a 10x and you would still get a pretty solid return over the next few years, but over the next few years, but let me just do uh some push back on the multiple. I mean, I do hear you on the 15X, right? Like these are quality businesses, but I guess the two things I'd point to is waste connections. You mentioned they bought some stuff, but you know, when I think waste, I guess it's permanency of the assets is what I think. people are going to come AGR or whatever a 100 years from now people are going to be you know their trash needs to be taken out. I don't know if the perian is going to be getting drilled in the same way call it 30 years from now. So I I mean maybe but are we is the is the difference between this at 10x and the 15x that waste connection should get is it kind of the questionability of the terminal value of the assets? Does that make sense? Okay, >> I think that well the wells are going to produce for a long time. So over over a decade. So even if you drill if you're drilling 10 years from now, you know, those walls will still still be going. Um but yeah, you say say it deserves a slight a slight discount because because you have a little bit more uh terminal value risk there or maybe the there's there's the u perception that the revenue is a little less resilience because it's tied to oil and gas. >> Yeah. I look I I don't think it's matter. I don't think it crazy matters. But >> yeah, let me finish. But >> yeah, >> you know, okay. So So say say you you you it deserves a little bit of a discount, but then I would say, well, what premium would you give it to it that it doesn't have to pay for the trucks? I mean, look at the ROIC of a municipal waste company. I mean, they're horrible. I mean, you 10% 11%. They're growing. They're growing, but they always have to replace the trucks. like you don't have you don't have the collection assets um that the municipal waste has and so yeah I mean >> are there some attributes of the wa municipal waste companies that I'd like to see in this business yes maybe you know you should get knock it a little bit yes but on the other hand you got to you know with respect to the the the maintenance capex that that you don't have here I mean that's a big premium >> great point great point let me ask you if I put oil prices to the side because we mentioned oil prices you know Perian is going to be producing at 50. Perian is going to be producing. If you said oil prices are going to 10, this probably isn't the the investment for you. But if I put like just dramatic collapse in oil prices to the side, what keeps you up at night about uh about water bridge or alternatively, you know, we talked about a lot of this growth is built in. It's MDC's, it's contract pricing, all this sort of stuff. Again, what breaks this? What keeps you up at night? What could stop that inevitable march to the 900 we talked about where you know if we're recording this on your 10th podcast appearance three years from now we say hey this didn't work out for XYZ reason. Yeah, I think that, you know, some environmental disaster or something like that, a pipeline breaks, you know, you have some, you know, some expensive lawsuit, you know, some some uh remediation work that's real expensive. I mean, that would be that would be a that would be worrisome. You know, I I think that um you know, I don't think it's a long-term risk, but anytime you have something that's complicated with respect to like like this where you have the sister company, Landbridge and Waterbridge, it's always going to be um ripe for short reports to attack it. And so, you know, you may wake up one day and it be down 20% because some short report came out. You know, I don't think that is like a long-term um issue for the business, but you know, it doesn't make it fun in the short term. it on this is completely off the cuff so forgive me for this but on the remediation and pipeline spill I mean I've been involved with pipeline spills before and on the oil side and it's a disaster right it's generally pipeline spills in the ocean but even on the ground it's a disaster oil kills everything it coats everything kills everything if you had a pipeline spill here I mean I understand this water is not potable right you and I aren't going to go drink this water or something but if you had a pipeline >> yeah it's corrosive it's nasty stuff >> it's but would it be as big a disaster as oil or because it's I I mean at its base it's water would it be like hey you know eventually it evaporates and it kind of goes away and it's not as bad like you know an oil spill we're talking hundreds of millions of clean up here if there's a spill is it tens of millions is it single digit millions >> yeah I don't know probably drive a lot of business to their landfill [laughter] >> so if it was their customer that if it was a customer that caused the spill then it would It'd be fantastic. It' be business business generous for them. But >> no, that that is true. Uh I I I was just curious because you know sometimes it does help when you quantify the actual downside. You know I do merger your arbs uh merger you're always worried about the breaking of downside but every now and then you'll have something where it's like hey in between the deal announcement and the deal closed they announced four new contracts for 100 million each. Guess what? The downside used to be 40. Now the downside's 50. And that completely changes the calculus. If the downside here is oil spill alla Exxon Valdez and you know we're talking billions of cleanup costs that's one thing. If a spill here is hey we need to go I don't know take hair dryers and evaporate all this water. >> I think the environmental damage of the Axon you know Valdez in the ocean is probably much more dramatic than it is in the middle of the desert in the most desolate part of the country too. That's exactly one of the many things I was driving to, right? Like it is very desolate pieces of the desert. So maybe a spill can be remediated in a lot of cheaper ways than kind of we think about spill. Yeah. >> I mean oil prices are obviously like the you know the big risk that you want to keep a an eye on. I think that it could be a good thing to have low oil prices in the short term just to prove out the the resilience of of of the thesis, but you know definitely it's tied to oil. Um and then you know the land bridge water bridge um you know common management dual stock kind of structure just makes them susceptible to I mean they have to manage the conflicts well they've done it in the past I think they'll do it in the future but you know you'll have short reports coming out where they you know make some claims. >> Yeah. So, I've probably asked four questions on the potential for conflicts of interest, and I think you've had good answers and they've managed this for years, but you've said it is there. A short report will probably come out at some point highlighting the conflicts of interest on one side or the other. >> They already have. They already >> Oh, really? I I hadn't seen seen >> one. There is one that that came out before Wbridge went public, but yeah. >> Okay. I I will I will go find that. But why why even have these as different businesses? I understand like the it just it strikes me that just the integration would make a lot of sense here. >> Well, the the integration operationally makes a lot of sense which is why they do it. But then, you know, if you look at land royalty companies like Texas Pacific and Landbridge can trade 25 to 40 times like that's that is not going to get appropriately valued within within a water bridge. And so it makes sense to have that separate. >> I I think I hear you though. You know, if you I guess at the same time, if you put these under the same roof and you start you did segment earnings and started breaking them out, everybody would just say, "Oh, you're you know, how are you doing segment pricing?" So, they'd probably have the same the same issues and you'd never get the multiple. But it does strike me that it just seems like these businesses belong together. Well, as a shareholder of both, I kind of like having them separate and, you know, if it makes if it makes people more comfortable, you know, I'm I'm a larger shareholder of Waterbridge. So, >> that's great. Uh, I think we've covered everything I wanted to cover. Anything else you want to talk about or anything a listener should kind of go away thinking about? >> I think we're pretty I think we're pretty good. I mean, you know, the thesis is pretty simple. there's there's a lot of organic growth um within the next few years. Um it wouldn't surprise me if they do an analyst day which I really think is needed because you know right now most of the people that are looking at this are energy investors or midstream investors. Um you want to get the waste guys looking at it. You want to get the journalists looking at it. Um the con the concept of of forcepace is is tough initially to get your arms around. I mean it worked out for me because you know I was invested for years in TPL. I would see the royalties that they would get paid for their produced water business. You know I owned some waste companies. I sat down with the secure guys at a conference and they explained the business to me. And so for me it was a little easier to get because I've had so much exposure to it. But I think landbridge and water bridge like they really need to have an investor day. And you know now that they're both public I I would see I could see them doing that in the in in the next you know two three four months. >> Forget the investor. You know what they needed? They needed you to come on this podcast because I know you came on this podcast for secure uh what 12 15 months ago or whatever and then all of a sudden the trail you mentioned the generalists. How many journalists do you see having uh having they write their letters that they say, "Hey, new position, Secure. It used to be Secure Energy. Now it's Secure Water Solutions." >> Secure's got a nice cadre of uh of um fans on on on Substack and Twitter. Um that, you know, Canadian companies are a little bit different that where you don't have to report um your you being a shareholder unless you're over like 10%. And so, >> yeah, >> there are some there are some pretty clever funds um that I I do know that are within the secure shareholder base that I wish they would um disclose their positions because it would help get a lot more exposure to that company. But you brought up Lambridge on the secure call that we did and Lambridge got um got inbound calls bec because of that. And so that's that that that helped me uh that helped me uh get closer to the management team and probably secure a larger uh allocation of the Waterbridge IPO. So, I have you to thank for that. >> Good for you, man. That's awesome. Cool. Well, hey, Chad, uh, this is great. I'm going to go count up the podcast because if this is the fifth one, we're we're losing the tide for the next one. You've got the the exclusive yet another value podcast shirt coming in the mail, but uh, this is great. Looking forward to chatting soon and looking forward to the next podcast. >> All right, man. Have a good day. >> A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.